Owner-occupied cash out financing in Texas sucks; need creative ideas to get around

[Timothy Katje]

Long-story short, I was apparently house hacking long before I ever heard the term used. I bought my first, and still only, duplex back in 2008 and have lived in it this entire time.  Long-term tenants who came with the property finally moved out last year, and now I want to put a bunch of money in to rehab everything.  But apparently, TX has some really difficult homestead laws on the books that prevent me from accessing any of the equity I have in my place.

My lender friend has suggested that I maybe look into converting my duplex into a condo regime, ensure that my homestead only applies to one of the units, and then refi my unit to grab some of the cash that I need to complete the tear-apart remodel of the next door unit, then rinse and repeat. I originally wanted to have a HELOC for this rather than take everything out at once, but current rates make that pretty much a nonstarter.

I like the idea of the condo conversion because I could sell off my property piecemeal over time, or just have more options on ways to dispose of it in the future.  But I'm also concerned about the unknowns and questions I don't even know to ask yet.  Like, what are some potential tax ramifications for this type of conversion, will I lose out on any of my cost basis deductions, what happens to my $250k auto-deduction if two sales occur (either same or different tax years), etc.  Obviously, I need to hire a CPA to really work out all of these details, but looking for pointers for things I need to ask.

Second, a lot of the work I want to do are exterior, which would be shared expenses.  I was hoping to have most of that work done prior to converting the property, but again, that's a chicken/egg situation.  I need the money to repair and improve the property first.

So, any pointers on my dilemma?  

In a perfect world, I would be able to just refi the whole damn duplex, do all that I want, then do the condo conversion.  But that's proven difficult.  I also don't want to get stuck with any hard deadlines, or exorbitant costs which I usually associate with things like hard lenders.

Thanks!

[Andrew Postell]

@Timothy Katje yeah, sorry you are just learning about this now. I would suggest NOT doing the condo conversion thing. Lot's of issues to that. But it seems like you examined the HELOC method...that's what most people do. So what was the rub against the HELOC here?

[Timothy Katje]

Basically just finding lenders that will do a HELOC on a homesteaded duplex property in TX.

A little further background, in preparation to make the conversion a little simpler, I "refinanced" my mortgage with my mother.  So, in the eyes of the banks, there is no first lien on my property.  But now, even to pay her back, everything looks like a cash-out refi, which all banks are saying is not allowed in TX.  HELOCs even more so.  I'd also need to borrow in the $200k range for loan repayment + repairs, which is beyond the scope of a lot of HELOCs.

Would've probably been a lot simpler had I just kept the really low rate with my first lender, but that ship has already sailed.

[Curt Riffel]

In DFW there is an active Facebook group for real estate, I would seek something similar for Austin and just drop this thread there. If you post it in the DFW one you would have 6 lenders in a day jumping to give you a HELOC.

[Jay Hurst]

Quote from @Timothy Katje:

Long-story short, I was apparently house hacking long before I ever heard the term used. I bought my first, and still only, duplex back in 2008 and have lived in it this entire time.  Long-term tenants who came with the property finally moved out last year, and now I want to put a bunch of money in to rehab everything.  But apparently, TX has some really difficult homestead laws on the books that prevent me from accessing any of the equity I have in my place.

My lender friend has suggested that I maybe look into converting my duplex into a condo regime, ensure that my homestead only applies to one of the units, and then refi my unit to grab some of the cash that I need to complete the tear-apart remodel of the next door unit, then rinse and repeat. I originally wanted to have a HELOC for this rather than take everything out at once, but current rates make that pretty much a nonstarter.

I like the idea of the condo conversion because I could sell off my property piecemeal over time, or just have more options on ways to dispose of it in the future.  But I'm also concerned about the unknowns and questions I don't even know to ask yet.  Like, what are some potential tax ramifications for this type of conversion, will I lose out on any of my cost basis deductions, what happens to my $250k auto-deduction if two sales occur (either same or different tax years), etc.  Obviously, I need to hire a CPA to really work out all of these details, but looking for pointers for things I need to ask.

Second, a lot of the work I want to do are exterior, which would be shared expenses.  I was hoping to have most of that work done prior to converting the property, but again, that's a chicken/egg situation.  I need the money to repair and improve the property first.

So, any pointers on my dilemma?  

In a perfect world, I would be able to just refi the whole damn duplex, do all that I want, then do the condo conversion.  But that's proven difficult.  I also don't want to get stuck with any hard deadlines, or exorbitant costs which I usually associate with things like hard lenders.

Thanks!

 @Timothy Katje   There is actually NO law against doing a cash out on an owner occupied duplex in Texas.  But, Fannie/Freddie do NOT allow so that is the confusion, but other sources  do allow. We do a decent number of cash out's on duplexes in Texas because everyone is told they can not do it then find us because we talk about it on our website. 

I would echo that you do not want to go down the condo regime route for a two unit. Just not enough scale to make that worth it. 

[Ryan Thomson]

@Timothy Katje I haven't heard of this being an issue before. You may have to look around to find a lender that can make this happen. Also, cashout refi requires you to get a new interested rate at current market rates (I'm guessing you don't want to do that). 

Why not do a HELOC? YOU can find some that are interest only. Also 6% on 100-200k of equity is not that big of a payment. If you spent part of the HELOC to fix up the place, does the rental increase justify doing that? It might, but those are the numbers you should run.

[Jay Hurst]

Quote from @Ryan Thomson:

@Timothy Katje I haven't heard of this being an issue before. You may have to look around to find a lender that can make this happen. Also, cashout refi requires you to get a new interested rate at current market rates (I'm guessing you don't want to do that). 

Why not do a HELOC? YOU can find some that are interest only. Also 6% on 100-200k of equity is not that big of a payment. If you spent part of the HELOC to fix up the place, does the rental increase justify doing that? It might, but those are the numbers you should run.

 This is Texas only issue due to paragraph 506(a) of the Texas constituition.